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In any great organization it is far, far safer to be wrong with the majority than to be right alone. —John Kenneth Galbraith
Asian currencies continue to sell off vs the $ on the heels of the news yesterday that South Korea said they will look into hot money inflows stemming from the $ carry trade and the Bank of Indonesia said they are looking into the foreign buying of bills. This follows the news a few weeks ago that Taiwan was limiting foreign deposit holdings and Brazil was taxing foreign inflow transactions. As I mentioned yesterday, we may have reached a short term pain threshold in terms of $ weakness and foreign countries are fighting back as they certainly won't wait for...
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December 10th, 2008 at 6:34 pm
as a point out, Adobe, and their Products, anywhere found, keep trying to pimp their “Flash” readers..
LSS: if at all possible, avoid them..
December 10th, 2008 at 6:48 pm
Barry: I’m having trouble seeing the item here. I’ll try again from home, but all I see is the outline of the object.
December 10th, 2008 at 7:32 pm
Suggests we’re treating the wrong disease.
December 10th, 2008 at 7:53 pm
Off-topic: Treasury market
The bond and stock markets seem to be out of sync… telling different stories, or am I wrong? The falling yields on T’s indicate rising levels of fear, but the VIX is trending lower and the stock market is stable to rising in recent days.
Does this not seem like a divergence of opinion? If the bond market is pricing in deflation to such an extent, then shouldn’t equity markets be fearing deflation also and selling off?
December 10th, 2008 at 8:27 pm
@KJ Foehr: It’s called the “PPT”, which I’ m beginning to believe is real…….
When in doubt, believe the bond markets.
December 10th, 2008 at 8:34 pm
You can access it online here:
http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf
December 10th, 2008 at 8:52 pm
@KJ Foehr:
The bond market rally is not fear based IMO. The biggest player in this de facto support of the dollar is China, and perhaps to a degree Japan. The Chinese just suffered a contraction in exports – some in their system believe that a weak yuan and stronger dollar protects the Chinese exports. They have also been selling their holdings in agency paper (Fannie and Freddy) and increasing their positions in treauries.
Analyzing bond markets is about cash flows. The U.S. tax receipts are dropping YOY and the treasury supply is accelerating – eventually, either the U.S. has to default on this debt gap or monetize to make up the difference, and that means a huge devaluation of the dollar.
China is fighting tooth and nail to prevent this devaluation of the dollar – only Monday China allowed the yuan to devalue against the dollar.
It is actually China’s increased purchases of treasuries that has propped up the dollar and limited the effects of the inflation that the Fed is trying to achieve. In a very real sense, China is contributing to the length and severity of the worldwide recession.
December 10th, 2008 at 9:05 pm
Thanks.
That makes sense, and I think it is closely related to what Niaal Ferguson was talking about on Bloomberg TV today: he fears global protectionism would be played out in currency “wars”, led by China, and which would / could drive the global recession deeper into deflation and depression. At least that’s what I took from it.
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vFCYpwY7ZHSo.asf
December 10th, 2008 at 9:35 pm
You are welcome. Here is a quote from someone much more expert – he writes at Dude, where’s the Dharma:
“In order for an export driven growth policy to be successful over time you have to get something of value for your exports. No nation would trade manufacturing output for, say, grains of sand.
China gets, mainly, US$s in return for its exports. If the US$ sinks their massive retained earnings evaporate. Instead of letting their economy adjust the Chinese are trying to enforce a high value for the US$ through increased purchases of US debt. They are, in a sense, trying to turn US$s into Gold.”
The Great Depression argument goes that a tight money policy caused the depression – this is basically Bernanke’s take. But what does a tight policy do? It restricts – or prevents – inflation. At the same time, propping up the dollar prevents inflation – mopping up the excess be buying bonds. So in a sense China is contributing to the tight money effect by fighting dollar inflation/devaluation.
Make no mistake – without a depression, the only way out of our mess is massive dollar devaluation. It will be ugly either way.
December 10th, 2008 at 9:52 pm
Winnie,
great points, point-outs.
Long behind my idea that the PROC should take their ‘claims’ up with the FedRes, after, of course, we tell Benber&Co. to pack up their Notes and Go Home..
December 10th, 2008 at 9:56 pm
KJ –
Thanks for the link to the Ferguson interview. That’s as clear an explanation of the horrible mess we find ourselves in as I’ve heard this week. Like to see old Niall tee it up with numbnuts Kiernan.
December 10th, 2008 at 10:12 pm
Thanks again.
It’s too deep for me, I think. I don’t know if the Chinese are holding USD or renminbi. If it’s dollars, then how does giving those dollars to the Treasury or bondholders mop up excess dollars? And how would that increase the value of the USD?
If, on the other hand, they are using yuan to buy USDs and then buying Ts, that should support the USD’s currency exchange rate. But I still don’t get the mopping up part. It seems like just buying dollars and then spending them for Ts, netting to zero change in total dollars.
Plus I’m a little confused on how driving down interest rates, by itself, would support the dollar. I thought higher rates did that. Like I said, it’s too deep for me. I don’t doubt that you / he are right, but I just can’t grasp how it works.
December 11th, 2008 at 7:38 am
KJ, great piece, thanks!
December 11th, 2008 at 9:29 am
Great discussion here today. The whole China factor is pretty far outside my knowledge area, but here’s my thoughts on it. As China has grown and their exports have increased the Yuan should have also increased in value as part of normal growth and inflation. If the yuan goes up, the cost of exports also go up and so demand will go down. The main reason we manufacture in China is because of the low cost, right? In order to keep the yuan in lock step with the dollar, China gets dollars for their exports and either keeps the dollars or buys treasuries. Since they don’t utilize the yuan for exports and maintain a large surplus of dollars or investments in dollars, they can effectively keep the yuan coupled to the dollar. This was a great strategy to keep exports growing, but now that the dollar is losing ground its going to be costly. I definitely agree that China is trying to keep the dollar up for as long as they can, but if they eventually seek to stop the bleeding they could easily flood the market with their stockpiles and trigger additional deflation.
I guess I’m just rehashing a lot of what’s already been said here, oh well.
December 11th, 2008 at 10:49 am
KJ,
Buying U.S. Treasuries is the Chinese equivalent of stuffing that money under a mattress.